Another shock may make us realise we've been living in a fuel's
paradise

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The right response to rising oil prices is not less tax, but better
public transport, writes Hugh Saddler.

'TAX relief for motorists." Sooner or later, when oil prices
rise enough, the call will be heard. This is one of the great
certainties of public policy debate. On this occasion it has taken
a little time, but reaching $US60 a barrel seems to have done the
trick.

History is always a good starting point for considering the
wisdom of any policy proposal. In late 1973 the world crude oil
price quadrupled over three months, reaching about $US40 a barrel
in today's terms. Australia was only marginally affected because we
were about 70 per cent self-sufficient in crude oil, exports of
crude oil were prohibited and the Government set the price of
Australian crude and kept it at the pre-oil-shock level.

Motorists and industry were thus protected from the price rises
experienced in most of the rest of the world. This meant they did
not change their oil-using behaviour in any significant way.

Then the world price doubled again in the 1979 oil shock. This
time the market got the signal.

While big cars went out of fashion, at least for a time, the
main response was a huge switch from petroleum products to natural
gas as the preferred source of non-electrical energy for
households, the commercial sector and most of industry.

In 1973 oil supplied 51 per cent of Australia's primary energy.
In 1979 it was still supplying 47 per cent, but by 1984 this had
fallen to 39 per cent.

Today oil supplies only 33 per cent of our primary energy. Use
of petroleum products is almost entirely confined to transport and
to the agriculture, mining and construction industries. This is one
reason the economy will be much less affected by the oil price
increase than it would have been in the past.

Another reason is that incomes have grown much faster than the
price of oil and faster, also, than our consumption of transport
fuels over the past 30 years. Households on average spend a smaller
proportion of their income on petrol than in the early 1980s, and
that will still be true even if the oil price reaches the level, in
real terms, of 1979.

The cause of the oil price increase is also fundamentally
different from the causes of the oil price shocks of the 1970s.
This time it is increased demand, not cartel pricing or
deliberately reduced supply. Higher prices suppress demand, but as
yet it is too early to say when or by how much this will
happen.

Experience suggests that as in Australia in the early '80s,
higher oil prices are very effective at stimulating fuel switching,
when substitute fuels are easily available. In the absence of
substitutes, to get significant demand restraint, prices need to
rise by a lot and to stay higher for a long time.

The signs are that this is just what we can expect. In the '80s
and '90s, the excess of potential supply over demand eventually
caused the world oil price to fall back to levels that, in real
terms, were not all that much higher than before the 1973 oil price
shock. Now there is no large source of additional supply that can
be quickly or easily brought to market.

What is more, most oil experts think that over the longer term
there are few if any untapped resources that are large enough to
support a substantial and prolonged increase in supply.

This means that the present price levels are more likely than
not to be the norm, unless or until the world as a whole
substantially reduces its demand for oil (a most unlikely
prospect).

In these circumstances, cutting petroleum product excise to
reduce the retail price of petrol sends the very worst kind of
signal to consumers, and is the very worst kind of short-term
policy populism. Governments should recognise that for some,
perhaps many, years there will be no easy technical fix to provide
an alternative to petroleum as the main energy source for road and
air transport.

What they need to do is help consumers to adjust to higher
prices and use less oil, by using more efficient road transport and
by changing their travel behaviour.

It is important to realise that road transport accounts for 56
per cent of Australian petroleum use and more than half of road
transport fuel use is in private cars and light commercial vehicles
in urban areas. So transport in our major cities needs to be the
focus of policy change.

The Commonwealth should change its taxes which favour large
four-wheel-drive vehicles over smaller cars, and private and road
transport over public and rail transport. State governments should
spend relatively less on roads, much more on providing effective
public transport alternatives to private car use and explore other
options to reduce people's dependence on individual use of private
cars.

What will be good for Sydney will also be good for the country
and the world.

Hugh Saddler is the managing director of Energy Strategies, a
Canberra consultancy company.